Valuation : Avoiding the Winner's Curse

by Ferris, Kenneth R.; Petitt, Barbara S. Pecherot

• ISBN13: 9780130348043
• ISBN10: 013034804X
• Format: Hardcover
• Copyright: 2002-01-01
• Publisher: FT Press

Summary

InValuation: Avoiding the Winner's Curse, authors Kenneth R. Ferris and Barbara S. Pecherot Petitt will help you master both the science and the art of M&A valuation. Concise, realistic, and easy to use, it brings together the field's best "rules of thumb," compares every leading traditional and alternative approach, presents examples and case studies from many industries, and offers practical solutions for today's key accounting, reporting, and tax-related challenges.

Table of Contents

Preface	xi
Valuation: An Overview	1	(14)
Why Firms Merge or Acquire: A Historical Perspective	3	(2)
Merger and Acquisition Premiums	5	(1)
The Process of Valuation	6	(2)
Alternative Valuation Frameworks	8	(5)
Summary	13	(1)
Notes	13	(2)
Financial Review and Pro Forma Analysis	15	(54)
Financial Review	16	(20)
Pro Forma Analysis	36	(9)
Sensitivity Analysis: Alternative Scenarios	45	(2)
Summary	47	(1)
Notes	48	(21)
Appendix 2A Nokia Corporation Financial Data	51	(2)
Appendix 2B Preparation of Statement of Cash Flows	53	(12)
Appendix 2C Displayed Formulas for EXCEL™ Spreadsheet	65	(2)
Appendix 2D Account Forecasting Alternatives	67	(2)
Traditional Valuation Models	69	(38)
Earnings Multiples Analysis	70	(4)
Discounted Cash Flow Analysis	74	(20)
Summary	94	(1)
Notes	95	(12)
Appendix 3A Calculating the WACC for a Complex Capital Structure	98	(3)
Appendix 3B Some Frequently Asked Questions and Answers About DCFA and Earnings Multiples Valuation	101	(6)
Alternative Valuation Models	107	(32)
Valuation in the Absence of Earnings or Cash Flow	108	(4)
Valuation When Capital Structure Changes	112	(11)
Economic Value Analysis	123	(3)
Real Options Analysis	126	(2)
Summary	128	(1)
Notes	128	(11)
Appendix 4A Discounted Cash Flow Analysis: Go America, Inc.	130	(2)
Appendix 4B Capital Cash Flow Analysis	132	(2)
Appendix 4C DCFA When a Firm's Capital Structure Changes	134	(2)
Appendix 4D The Black-Scholes Model	136	(3)
Accounting Dilemmas in Valuation Analysis	139	(40)
Assessing Economic Reality	140	(2)
Income Statement Transformations: Forecasting Permanent Earnings and Free Cash Flows	142	(15)
Balance Sheet Transformations: Forecasting the Equity Value of a Company	157	(11)
Cash Flow Statement Transformations: Forecasting CFFO and Free Cash Flow	168	(2)
Summary	170	(5)
Notes	175	(4)
Financial Reporting and Tax Considerations in Mergers and Acquisitions	179	(28)
Financial Reporting: To Combine, or Not to Combine?	181	(2)
Consolidated Reporting: Pooling versus Purchase Accounting	183	(7)
Pooling versus Purchase Accounting: The Effect on Firm Valuation	190	(1)
Tax Considerations of Mergers and Acqusitions	191	(2)
Minority Interest	193	(1)
Accounting for Goodwill	194	(3)
Summary	197	(4)
Notes	201	(6)
Appendix 6A Negative Goodwill	205	(2)
Some Final Thoughts	207	(6)
Valuation: A Debriefing	208	(2)
Some Caveats to Consider	210	(1)
Closure	211	(2)
Bibliography	213	(5)
Index	218

Excerpts

Preface Valuation is the essence of finance. It asks the question, "What is the 'fair' price to pay for an asset that has a set of uncertain future cash flows?" In the past, the answer to this question was provided by time-tested methods. In recent years, however, new approaches have emerged as practitioners have sought improved ways to assess value. New approaches have also evolved in response to the development of the "new economy" and the many e-commerce companies that were privatized without a history of either earnings or cash flows. With the backdrop of a rapidly changing valuation environment, this book presents a practitioner-oriented view of the fundamentals of firm valuation. The focus is on valuation for acquisition purposes. In large measure, an acquisition is viewed herein as equivalent to the purchase of any productive asset, namely, as a capital budgeting exercise. Furthermore, valuation is considered to be an art, not a science. Consequently, the reader will find that there are many "rules of thumb" but few inviolable principles to guide them. The metrics used for valuing companies are not well defined, varying often according to the objectives of the valuation and often with the companies themselves. Consequently, executives and equity analysts face many choices and dilemmas as they try to assess value. Throughout this book, practical solutions are suggested for dealing with these dilemmas and for helping the reader make informed choices. The methods discussed are principally for use in nonfinancial companies; the topic of valuing financial companies is beyond the scope of this book. To use this book effectively, the reader will need an understanding of the fundamentals of accounting and finance. Furthermore, a background in spreadsheet software, such as EXCEL, is also beneficial.